Aug inflation accelerates; rate hike seen

New Delhi: Headline inflation based on the wholesale price index came perilously close to double digits, putting further pressure on the central bank to increase key rates before it meets to review monetary policy.

Annual inflation rate shot up to 9.78% in August from 9.22% a month ago mostly due to the increasing price of metals, cotton and rubber. Inflation was 8.87% in August last year.

The Reserve Bank of India (RBI) has maintained an aggressive stance on inflation, raising policy rates 11 times since March 2010. The Department of Industrial Policy and Promotion, which releases the data, revised June inflation to 9.51% from the provisional figure of 9.44% announced earlier.

While July industrial output data on Monday was the worst in nearly two years, adding to the argument against a rate increase.

Expectations for a rate increase are not unanimous, however, with Goldman Sachs among those expecting the central bank to pause in its tightening cycle.

Rate hike or not, RBI governor Duvvuri Subbarao is widely seen to be nearing the end of a tightening cycle that has made the RBI among the most aggressive central banks anywhere during the uneven global recovery from the financial crisis.

Other Asian central banks have been turning dovish as growth in the region weakens amid a darkening outlook for the US and the euro zone, although China’s central bank said on Monday that inflation, which fell in August from a three-year peak, was still high and that it would maintain its policy settings.

Manufacturing inflation quickened to 7.79% in August from 7.49% in the previous month, indicating that manufacturers still retain some pricing power, adding to inflationary pressures in the economy.

Analysts say that stripping out the volatile capital goods sector, the index of industrial production (IIP) shows a picture of growth moderation, not collapse.

Demand for consumer goods is still holding up and growth in exports, though down from July levels, is still robust at around 44% while non-food credit growth at more than 20% is still above the targeted 18%.

However, weakening investment demand, industrial slowdown, and bleak global conditions add downside risks to growth. The falling rupee, now trading close to its weakest in two years, could inflate imported price pressures and add to the case for a rate increase on Friday.